US Natural gas futures slip – is the honeymoon over?

Commodities

With US natural gas futures on a downward trend, we ask is time up for high gas prices?

Natural gas trading

Natural gas futures start the week in the red

What a couple of weeks it’s been for the Henry Hub natural gas contract.

It seems only yesterday that we were talking about natural gas reaching all-time highs. It’s certainly true that wholesale commodity prices in Europe and Asia are still exceptionally high.

While oil continues to rise, gas looks like it’s on the decline. But in terms of the US, which Henry Hub focuses on, we’re asking is the honeymoon over?

Prices were firmly in the red on Monday. Starting the day at around $5.20, Henry Hub futures dropped to $4.90 at their lowest. As of Tuesday morning, prices had climbed back into the green, before slipping down to the $4.90 level.

Why the slump? There are a couple of factors at play.

First up, there is the weather. Mild to seasonal high temperatures across much of the US is capping off demand.

Natural Gas Weather states: “One weather system will bring showers to New England, while a second system tracks through the Mtn West w/rain and snow, but both mild w/highs of 40s to 60s. The rest of the US will be nice w/highs of 60s to 80s for very light national demand.

“The system currently over the Mtn. West will track across the Great Lakes and Northeast this weekend w/highs of 40-60s, lows 20s-40s for a modest bump in national demand.

“For next week, weather systems will bring rain and snow to the West, while very nice over the eastern 2/3 of the US. Overall, national demand will be LOW through Friday, then MODERATE this coming weekend.”

Basically, not a lot of need for gas heating in key consumption areas of the US.

However, we have seen a slight bump in gas consumption. For the week ending October 8th, US consumption increased 1.3% week-on-week.

We’re also in injection season: the time of year when the US looks to build stockpiles in line with colder winter temperatures.

The EIA forecasts that US natural gas inventories ended September 2021 at about 3.3 trillion cubic feet 5% less than the five-year average for this time of year. Injections into storage this summer have been below the previous five-year average.

This was down to a combination of hot summer temperatures leading to more electricity use for cooling purposes and increased exports. Despite this, domestic production has remained fairly flat across the year. A sizeable chunk of US production infrastructure was shuttered earlier in the year due to Hurricane Ida.

The latest EIA data ahead of Thursday’s release shows total stocks standing at stood at 3.369 Tcf for the week ending October 8th – down 501 Bcf from a year ago and 174 Bcf below the five-year average once again.

Gazprom to the rescue?

Switching to European markets, Gazprom might be following the lead of President Putin (read: orders of President Putin) by stepping up production capacity for its long-term gas deals.

“Of course, if Russia’s European partners increase orders and if the volumes in long-term contracts grow, I think that Gazprom will surely develop its production capacity,” Deputy Prime Minister Alexander Novak said in an interview during last week’s Russian Energy Week summit.

This is pipeline all part of pipeline politics. Russia has been accused of gas market manipulation in an effort to force the EU into accepting the Nord Stream 2 pipeline. Never mind that this is pretty much a necessity for Germany’s energy needs, but the bloc has long been basically hostile towards Russia.

But as the European gas crisis rolls on it seems the deck is stacked fairly heavily in Gazprom and Russia’s favour. They’re the ones with the gas. They’re the ones with the export infrastructure. They’re the ones with more customers than just Europe.

Unless Europe picks up more gas from America or Qatar, then it’s likely to remain reliant on Russian products for the foreseeable future.

Can crude oil prices make it to the triple digits this year?

Commodities

Oil prices are mounting a strong upward charge as the natural gas crisis rolls on. The question is how far can oil go?

Oil trading

A combination of factors sent oil prices skyward over the weekend. It essentially boils down to the state of inventories, supplies being kept in check, and demand recovering from the summer’s Delta variant COVID-19 wave.

Then you can factor in the global natural gas shortage. A big part of the support crude prices are getting comes from the gas crisis in the form of fuel-switching – or at least the idea of increased fuel switching.

Oil bulls believe that Europe and Asia could pick up more oil for their power demands this winter to compensate for tighter gas supplies. More oil use = more oil demand = oil prices.

“An acceleration in gas-to-oil switching could boost crude oil demand used to generate power this coming northern hemisphere winter,” ANZ commodities analysts said in a note published earlier in the week.

If this does occur, despite Russian President Putin saying he would step in and increase gas supplies to Europe, then fuel switching could be the catalyst that sends oil prices into three-figure territory.

However, JPMorgan analysts have said they’ve yet to see any evidence of a major oil-to-gas fuel change just yet.

A note from the investment bank said: “This means that our estimate of 750,000 barrels per day of gas-to-oil switching demand under normal winter conditions could be significantly overstated.”

So, under present circumstances, the market appears to be pricing in this shift, but it might not actually occur.

Crude prices were on a strong footing at the start of the week. As of Tuesday morning, WTI futures were trading for around $80.5.

Brent crude futures are exchanging hands for $83.83.

There was talk last week that the US would be dipping into its strategic reserve, which did cause prices to wobble. However, the Department of Energy has walked back on these claims. If anything, US inventories are going up.

Oil & gas infrastructure in the Gulf of Mexico, previously closed due to Hurricane Ida passing by, is back online. Rig counts are rising week-on-week. That means more US-sourced crude is being pumped into its domestic stockpiles. As such, there is no need to tap the nation’s strategic reserves just yet.

Crude inventories rose by 2.3 million barrels in the week to October 1st to 420.9 million barrels. Analysts were expecting a 418,000 drawdown.

Natural gas trading

The ongoing gas crisis was creating plenty of upside risk at the start of the week. However, it looks like traders were looking at improving US natural gas supplies for this week’s price action.

Warmer temperatures are playing heavily into the US 15-day weather outlook. Cold temperatures are departing from much of the US, and while unseasonable warmth is good for those who want to go out and about, it’s not so great for price action.

October demand could fall to its lowest for over forty years based on prevailing weather forecasts. It’s possible that the demand picture could extend into November too.

However, warm weather will help the injection situation.

The Energy Information Administration (EIA) reported last Thursday that domestic supplies of natural gas rose by 118 billion cubic feet (Bcf) for the week ended October 1st.

S&P Global Platts analysts were expecting a smaller 111 Bcf rise.

There is some way to go before stockpiles are in line with seasonal norms. Total stocks now stand at 3.288 trillion cubic feet (Tcf), down 532 Bcf from a year ago and 176 Bcf below the five-year average.

In terms of price action, Henry Hub futures were trading at $5.79 on Monday morning and looked like they were ready to challenge $5.80.

Prices pulled back to $5.40 across the Monday session leaving. They dropped further, roughly 2%, to $5.20, so last week’s major rally appears to be petering out. Where they go now seems tied in with US weather patterns. There’s still a gas shortage but as mentioned above, the focus is on what’s happening in the USA instead of Europe and Asia.

Vlad to the rescue? Putin steps in to calm nat gas crisis

Commodities

Vlad to the rescue… Looks like Putin has just come in to call a (temporary) halt to the gas crisis in Europe, finally stepping in with comments that have offered some stability to the market after a tumultuous morning/week.

Putin says:

  • Boosting gas supplies to Europe
  • Ready to stabilise global energy market
  • Gazprom supplies to Europe to reach new record
  • Increasing gas transit via Ukraine & will exceed contractual obligations for gas via Ukraine.

Henry Hub Nat Gas prices were offered on the comments/headlines that Russia is ready to help out. The situation remains difficult of course but could be that Putin has just put a ceiling on these crazy market moves for the time being. There are other factors but a boost in supply from Russia would ease immediate concerns in Europe. Longer-term of course the lack of fossil fuel capex in response to high prices is a big driver of prices staying higher for longer. Winter is coming and supplies are still very short and markets volatile. Plus how long does Putin play nice?

Anyway, it seems to have calmed the market for the time being. One thing you have to take from all this is that Nord Stream 2 is surely going to be approved soon…Merkel stressing in comments just a few minutes ago that it is not yet ready.

Henry Hub prices tumbled off the highs to test $6 again on the news crossing the wires. UK prices have meanwhile completed a heck of a round trip with a daily gain of 40% reduced to 4%. Whilst US nat gas prices are not directly correlated to the situation in Europe we can see that the comments from Putin hit prices as they crossed the wires. Oil was also pulled down on the comments.

Natural gas chart 06.10.2021

Oil braces for OPEC+ meeting & Hurricane Ida fallout

Commodities

Traders look to gauge the impact of Hurricane Ida on US oil and OPEC+’s September meeting this week, while natural gas seeks a supply/demand in the battered southern states.

Oil trading

Hurricane Ida smashed through US on and offshore oil production infrastructure at the weekend, leaving behind a trail of closed or damaged rigs in its wake. Even the crucial Colonial Pipeline, a vital fuel artery, was closed.

All bad news for oil prices? Yes and no. We’ve seen in the past that extensive shuttering of infrastructure can actually be bullish if it leads to a supply squeeze. High demand meeting lower output equals higher prices.

But Ida’s devastation isn’t limited to rigs, refineries, and pipeline shutdowns. We can’t forget the civilian population. Homes have been smashed. One million people in Louisiana are without power. In the current climate, the numbers of people going to work in affected Southern states will have dropped and with it fuel demand.

The picture is still blurry – but oil has managed to keep its gains from across the past week into trading this morning. The key benchmarks are approaching levels similar to those at the end of May when prices really took off.

WTI is currently trading for around $69.20. Brent futures are floating around the $72.25 level.

Oil also got another boost this week when OPEC+ members indicated it reconsider its planned output increases in the wake of new market realities.

Kuwait’s Oil Minister Mohammed Abdulatif al-Fares on Monday said: “The markets are slowing. Since COVID-19 has begun its fourth wave in some areas, we must be careful and reconsider this increase. There may be a halt to the 400,000 (bpd) increase.”

The cartel meets on Wednesday to discuss how best to proceed in a Delta-variant dominated world.

We’ve seen rising cases impact on oil demand throughout Asia and in China, although new reports suggest Chinese imports are picking up pace after a couple of months of slowing output.

OPEC+ has had to really step up its supply/demand balancing act over the last 18 months or so. It had denied President Biden’s request to open the taps wider in the last month, and this talk of halting production raises could help support prices if demand continues to fall.

US crude oil inventories experienced another drawdown in the EIA’s latest report. According to the energy agency, US crude stockpiles decreased by 3.0 million barrels from the previous week.

At 432.6 million barrels, U.S. crude oil inventories are about 6% below the five year average for this time of year.

Natural gas trading

Hurricane Ida’s impact isn’t just limited to oil. The heartland of US LNG production lies in Ida’s destructive path. Some 95% of Gulf of Mexico production has been affected so far.

Onshore infrastructure in its path fared better. Any damage done has not been as serious as previously forecast

Price action still remains relatively robust. Natural gas is trading for around $4.328 at the time of writing, although it has fallen away from the yearly highs seen a couple of weeks ago.

But the real test now is demand. A million Louisiana citizens are without power. Hot temperatures are potentially on their way, but without the ability to air condition their homes, cooling gas demand may sink in these key areas. That could weigh heavily on price action going forward. We’ll know more once a concerted relief effort has been made.

Away from Louisiana, demand could be generated by hot temperatures in California, the Plains and Texas, but it remains to be seen if this will offset demand from hurricane-hit regions.

The US natural gas rig count, however, has dropped – likely shuttered as Ida made its way through the Gulf. According to Baker Hughes, the rig count dell by 5 to 97 last week. That’s the lowest seen in over two months.

Because this was hurricane-induced, however, we may see these rigs come back online soon.

Working gas in storage was 2,851 Bcf as of Friday, August 20, 2021, according to EIA estimates. This represents a net increase of 29 Bcf from the previous week. Stocks were 563 Bcf less than last year at this time and 189 Bcf below the five-year average of 3,040 Bcf.

Oil prices: No super-cycle, says IEA

Commodities
  • IEA signals that there will be no peak oil demand yet global oil consumption is forecast to be 4m b/d higher in 2026 than it was in 2019.
  • World oil demand is expected to rebound by 5.5m b/d in 2021 after contracting by 8.7m b/d in 2020.
  • No super-cycle as oil inventories still look ample compared with historical levels

Oil prices declined a touch after the International Energy Agency warned against oil entering a supercycle as the market remains well supplied despite the decline from last year’s overhang. This somewhat goes against the recent narrative that has focused on an increasingly tight market, so will be one to watch to see if sentiment plays out to the upside as the Fed meets and the broad reflation trade encounters doubts.

“Oil’s sharp rally to near $70/bbl has spurred talk of a new super-cycle and a looming supply shortfall,” the IEA said. “Our data and analysis suggest otherwise.”

In its monthly report the agency noted that by the end of January, OECD industry stocks, were still 110m barrels higher than a year ago, although only around 63m barrels above the 5-year average. On top of this cushion, there “a hefty amount of spare production capacity has built up as a result of OPEC+ supply curbs”. The IEA seems to say that OPEC supply restraint means any shortfall due to higher demand can be easily turned back on.

However, we could still oil prices move higher from current levels as demand grows and inventories are drawn down.
Global oil demand is forecast to grow by 5.5 mb/d to 96.5m b/d, recovering around 60% of the volume lost in 2020. Oil demand will return to 2019 levels by 2023

The IEA notes that “stronger demand and continued OPEC+ production restraint point to a sharp decline in inventories during the second half of the year”. But it cautions that there is “more than enough” oil in storage to keep global oil markets adequately supplied.

Other highlights

  • World oil demand is expected to rebound by 5.5m b/d in 2021 after contracting by 8.7m b/d in 2020. A stronger economy and vaccine deployment will support growth in the second half, reducing the oil demand gap vs 2019 from 4.8m b/d in 1Q21 to 1.4m b/d in 4Q21.
  • Global refinery throughput rose 440,000 b/d in January but was 5m b/d lower year-on-year. Arctic weather in the US caused a 1.9m b/d month-on-month decline in February throughput and a 1m b/d downward revision to the global 1Q21 estimate. Chinese refinery runs were 2.2m b/d higher than a year ago in January-February and are estimated to have reached a new record high of 14.3m b/d in February. Global throughput is set to resume growth from 2Q21.

WTI futures

Having traded firmly above $65 in the wake of the API crude draw on Tuesday, WTI (May) seemingly retreated on the IEA report to test $64.60.

WTI (May) seemingly retreated on the IEA report to test $64.60.

Trading oil: CFDs vs futures

If you want to trade oil, you will have to understand the differences between CFDs and futures. Luckily, we’ve put together this handy guide to help you get started with crude oil trading. 

How to trade oil: CFDs & futures 

CFDs (contracts for difference) and futures contracts are two of the most popular ways to trade crude oil. They may seem similar, but the two are separated by some important differences. Understanding both will help you adapt oil commodities into your own unique trading style. 

Futures contracts 

Futures are contracts in which an exchange for a set amount of oil to be sold at a set price on a set date is agreed upon.  

Exporters and importers use futures to insure against any potential adverse effects of oil price volatility. Typically, oil futures are for contracts on 1,000 barrels of oil. A $1 price movement equates to $1,000 here. Futures contracts are settled on the physical delivery of oil but can also be settled with cash too. 

WTI and Brent are two of the three major oil benchmarks. These are oil blends used to gauge oil prices around the world. The other benchmark is Dubai Crude. 

Specific oil futures are traded via commodities exchanges. Brent futures are traded on the Intercontinental Exchange (ICE) in London, as Brent refers to a blend of oil extracted from fields in the North Sea. WTI futures are traded on the New York Mercantile Exchange (NYMEX). WTI stands for West Texas Intermediate, historically coming from oilfields in Western Texas. 

There is often a high level of complexity involved in professional oil trading, hence why it is most typically done by professional oil traders.  

Oil CFDs 

Oil CFDs are a much more accessible way for retail traders to speculate on the oil share price without the need for the substantial collateral required to trade futures contracts, or without having to physically own any oil. Oil futures CFDs simply mirror the movement of the underlying contract. 

CFDs are leveraged products. They give you market exposure for a percentage of the full trade you wish to make. This means that you can potentially make profits if the market moves in your favour. 

You can also lose money if the market moves against you and you are not using adequate risk management tools. 

Let’s look at an example.  

With a WTI CFD, you would be trading on the price movements of a minimum of 10 units of WTI oil (i.e., ten barrels). 

If the oil price is $60 per barrel, your exposure would be $600 (10 x 60). As oil futures use 10% leverage as standard, your initial margin would be $60 (10% of $600).  

If the price of oil rises by $1, you would then make 10 x $1. If the price fell by $1, you would lose 10 x $1, because you are trading on margin. 

Moreover, in addition to CFDs of futures contracts, it is possible to trade Spot Oil as a continuous contract which does not expire. If you are thinking about trading oil via CFDs, please be aware of the risks. You can make profit, but you can also make big losses. Only trade if you can afford to lose money. 

What affects oil prices? 

The crude oil share price, and oil prices in general, are affected by lots of different things, including demand for oil, production costs, output, geopolitical events in the Middle East, decisions by OPEC and Russia, the seasonal driving habits in the US – the world’s largest crude market (10% of global daily oil demand depends on gasoline demand from American motorists), cyclical economic growth and numerous other factors.   

For example, the oil price dropped massively at the peak of the Covid-19 pandemic. That’s because the restricted movement of people and goods meant there was less demand for fuel oil. Fewer people around the world were traveling by car, boat, or plane 

Technological shifts that allow for cheaper production have also altered pricing structures. For decades, WTI was traditionally priced higher than Brent Crude. With the advent of shale extraction technology and WTI price declines, Brent now usually trades at a higher price than West Texas Intermediate. 

Oversupply has been a persistent problem in recent years. You may hear of a glut on oil markets. That’s when oil production outstrips oil demand. OPEC, and allies keep a close eye on oil production levels because of this. Since the Covid pandemic, for instance, OPEC and allies have introduced production cuts. 

US oil stockpiles are also carefully monitored. The US, as the current world’s largest economy, is the largest consumer of oil globally. In 2019, it was using over 19 million barrels of oil per day. Because of this, the volume of oil the US keeps stockpiled is carefully watched by oil traders. 

The Energy Information Administration’s (EIA) Crude Oil Inventories report is published every week, usually on Wednesdays at 15.30 GMT. This measures the weekly change in the number of barrels of commercial crude oil held by US firms. 

If there is a higher-than-expected increase in crude inventories, that may mean weaker demand, and may mean oil prices fall. The same can be said if a decline in inventories is less than expected. 

 If the increase in crude inventories is lower than expected, that may mean demand his higher, which means prices may rise too. The same can be said if a decline in inventories is higher than expected. 

The US Oil rig count is also watched closely by oil traders. As This counts the number oil rigs functioning in the United States. It’s important to track because it can give an idea of how much oil production is occurring.  A lot of oil being produced can mean high demand, which in turn can mean high prices. Low production can mean low demand, thus lower prices. However, if there is a lot of oil being produced, but low demand on the market, this can cause a glut, and subsequently lower prices.

Is OPEC’s gamble paying off?

Has OPEC’s belief that a $70 oil price will not lead to a US shale oil boom paid off? Elsewhere, changing weather patterns set the tone for natural gas markets going forward. 

Oil trading 

WTI is trading around $64 this morning, with Brent at the $68 mark. A couple of weeks ago, Brent had breached $70, which, while good on paper, actually caused some shaky knees throughout OPEC.  

The cartel’s current mission statement is to support prices through production cuts. The $70 Brent price, however, appeared like a green light for US shale to start bumping up production. If that was the case, with more oil entering the markets, then it’s logical that prices would drop, as demand would not balance with increased supply. 

$70 was quite a gamble for OPEC+. Luckily for them, it seems to have paid off. US shale oil producers instead continue to practice capital responsibility, instead of chasing higher production volumes to capitalise on higher prices. 

OPEC’s production cut strategy is likely to remain the key support for oil prices going forward. At its meeting last week, the cartel committed to keeping its production cuts static. Saudi Arabia also confirmed it would be keeping its voluntary 1m bpd cut in place too. 

US shale firms with no production outside America are forecast to raise production modestly in h2 2021, according to Bloomberg Intelligence Data, with levels rising from 6.5m bpd in 2020 to 7.2m bpd in 2021. 

JPMorgan expects U.S. oil output to average 11.36 million barrels per day this year compared to 11.32 million bpd in 2020. 

For the US market, it looks like gasoline is the key focus for the rest of the year. RBC Capital said fundamentals for summer gasoline are “almost bullish”. Stocks dropped at last EIA report printing for week commencing March 5th, 2021. Motor gasoline inventories decreased by 11.9 million barrels and were about 6% below the five-year average for this time of year. 

A $4 per gallon gasoline price may be coming to the US by the summer. A supply squeeze coupled against higher demand, as lockdown eases thanks to US vaccine rollout, which could cause gasoline prices to accelerate. 

Total US commercial crude oil inventories increased by 13.8 million barrels from the previous week, according to latest EIA data. At 498.4 million barrels, U.S. crude oil inventories were about 6% above the fiveyear average for this time of year. 

Natural gas trading 

Cold weather systems are making their way through the central US states right now and could start hitting the Northeast very soon. But natural gas traders live in a world a fortnight ahead of everyone else, and the forecasts suggest warmer temps will blunt current weather’s impact. We could be seeing lower demand in key states as a result, leading to a bearish EIA storage report. 

Latest printing showed a 52 Bcf drawdown with stocks ending the period at 1,793 Bcf, compared with the year-earlier of 2,050 Bcf and the five-year average of 1,934 Bcf. Stocks are likely lower due to the recent frigid temperatures. 

Texas refinery capacity is back after a big thaw following the historic big freeze. Higher output is likely, but what is also likely is lower heating gas demand throughout the Southern US. The freak snowstorm that submerged the Lone Star State is probably not going to rear its frostbitten head any time soon. However, lower demand here could coalesce with warmer temperatures in the north to crystallise into lower natural gas prices. 

OPEC+ meeting preview: tight supply likely to continue

  • Backwardation points to supply deficit
  • Inventories falling globally
  • OPEC and allies likely to raise output

Crude oil futures rallied in the Asian session before paring gains as the European session progressed as traders look ahead to the OPEC+ meeting this week. OPEC and allies meet on March 4th with market participants looking at a likely lower of output constraints.

Going into the meeting, we note that global inventories are falling at their fastest rate in two decades, according to analysis by Morgan Stanley. Clearly with the ongoing demand uncertainty there is a risk that OPEC overtightens by maintaining output curbs for too long. The risk is now one of keeping too much oil on the side lines and not pumping enough, which will drive prices sharply higher. Goldman Sachs says Brent will hit $75 this year, whilst Trafigura is very bullish.

OPEC’s 13 members pumped 24.89m bpd in February, according to the latest survey, down 870,000 bpd from January in the first monthly decline since June 2020. In February the largest supply cut came from Saudi Arabia, which pledged an additional, voluntary 1 million bpd production cut for February and March. As a result, compliance with pledged cuts stood at 121% in February, up from 103% in January.

OPEC’s 13 members pumped 24.89m bpd in February, according to the latest survey

Current output constraints stand at a little over 7m barrels per day, with the 23-country OPEC+ grouping likely to agree to reduce this by another 500,000 bpd from April on Thursday. In addition, it’s likely Saudi Arabia will confirm the additional 1m it removed from the market will return in April. This would bring an additional 1.5m bpd on stream, but even this may not be enough to satisfy demand. 

 

OPEC will be mindful of the IEA report that suggested that inventories could start to climb again in the second quarter due to seasonal factors before drawing down again in the second half of the year. “The rebalancing of the oil market remains fragile in the early part of 2021 as measures to contain the spread of Covid-19, with its more contagious variants, weigh heavily on the near-term recovery in global oil demand,” the IEA’s latest Oil Market Report said. “But fresh support has been provided by a more positive economic outlook for the second half of the year, along with a pledge from OPEC+ to hasten the drawdown of surplus oil inventories.” 

Backwardation

The spread on Brent futures contracts points to significant short-term supply shortage. Six-month spreads are above $3, while the December contract trades about $4 below the May contract as the front months are commanding a significant premium over back months, a situation known as backwardation. This implies bullish positioning and tight supplies.

Brent futures contracts are showing backwardation.

And we are seeing similar levels of backwardation here on WTI futures, with the Apr contract trading about $4 above Dec.

We are seeing backwardation on WTI futures contracts.

 

US shale?

OPEC should be mindful of US shale producers, albeit the conditions for a sharp recovery in output are not what they once were. Nevertheless, OPEC+ could – by keeping output too tight – create conditions for a sharp acceleration in prices that see rivals deliver more. Baker Hughes said oil and gas producers added rigs for a 7th straight month for the first time since May 2018, although the rate of growth slowed as the Texas deep freeze hit. The less OPEC does to return the production cut last year the quicker these numbers should rise.

US rig counts

US oil & gas split

Chart: Pretty close to the top of the BB range and the upwards channel we’ve been in since Nov. MACD bearish crossover to be watched.

 

Pretty close to the top of the BB range and the upwards channel we’ve been in since Nov.

How to trade oil

Crude oil trading is a popular activity for commodity traders. Here’s how you can get started with oil trading. 

How to trade oil for beginners 

Examining the oil market 

When we say trading oil, we do not mean physically exchanging cash for a barrel of liquid crude. Instead, we’re looking at the different financial instruments that are used by commodity traders to buy and sell oil. 

The two most commonly traded oil varieties are WTI (West Texas Intermediate) and Brent Crude. These are called benchmarks because their prices are used as point of reference for traders of other blends, i.e. different types of oil. The other oil benchmark is Dubai Crude. 

Crude oil share prices are a representation of the current value of a barrel of oil. Different blends have different prices. WTI has a different price to Brent, for example. At the time of writing, WTI futures were trading at around $52.90, whereas Brent futures were trading around the $55.70 level. The difference between the two is called thBrent WTI Spread. 

Prices are affected by many different factors: economic health of countries worldwide; health of manufacturing sectors; global oil demand; outside factors like the Covid-19 pandemic, and so on. 

Oil futures vs options 

Oil futures are contracts in which an exchange for a set amount of oil to be sold at a set price on a set date is agreed upon.  

Demand for oil ebbs and flows, so prices reflect that. As the price per barrel of oil goes up or down, so do the price of crude oil futures. Exporters and importers use futures to insure against any potential adverse effects of oil price volatility. Traders, on the other hand, use futures to speculate on the movement of oil prices without owning, buying or selling oil commodities.  

This means they do not have to worry about logistical aspects like transport and storage, nor do they have to sit and wait for the price to increase while their barrel sits in a storage facility. Instead, traders can use futures contracts to take advantage of the same price increase without thinking about the physical logistics of oil. 

Options are similar to futures, but with an important distinction. Options give you the right to buy a set amount of oil at a set date for a set price. Unlike futures, however, there is no obligation to buy with options. You can walk away from the trade if you want to.  

Where can you trade oil? 

The oil benchmarks are listed on exchanges around the world, including the Intercontinental Exchange (ICE) and New York Mercantile Exchange (NYMEX). These are tradeable alongside other hydrocarbon products like natural gas, heating oil, and various types of oil-derived fuels. You can trade the derivatives of these oil futures with a CFD trading account at Markets.com. 

Oil spot prices 

Crude oil share prices can also be expressed as spot prices. Spot prices represent the cost of buying or selling oil and taking immediate delivery, i.e. on the spot.  

A spot price is different to a futures price. Futures show how much the markets think oil will be worth when that future contract expires. Spot prices show much it is worth right now. 

Spots and futures haven effect on each other through two important concepts: contango and backwardation. 

  • Contango – If the spot price is lower than the futures price, then the market is in contango. This is because futures are trading on a premium from the spot price. Physically delivered futures contracts might reach this market state due to factors like storage, financing, and insurance costs impacting oil prices. Futures prices can also change as market participants change their views of the future expected spot price. 
  • Backwardation – If the spot price is higher than the futures price, then the market is in backwardation. Markets may enter this state if there are currently more advantages to owning the physical product, I.e., keeping oil production high. This is called the convenience yield. It’s an implied return on warehouse inventories (I.e., barrels stored in a warehouse). The convenience yield is inversely related to inventory levels. When warehouse stocks are high, the convenience yield is low and when stocks are low, the yield is high. 

Methods of crude oil trading 

  • Buying futures and options – To trade these, you will likely need access to the right exchange. The top oil exchanges have restrictions in place as to who can actually buy futures and options, so a lot of the time speculation is undertaken via brokers. 
  • Trading CFDs – Contracts for difference allow you to speculate on the movement of futures and options without owning those assets or any physical oil. You don’t need to be a professional to start trading oil. Instead, simply create an account on our Marketsx platform and you can begin trading CFDs on futures, as well as spots. You could also consider speculating on an oil ETF too. 
  • Investing – A third option is to invest in oil company shares, either through individual company’s stocks, or through a collection in an ETF. Oil company stock prices are influenced heavily by the crude oil share price, but they can still sometimes offer good value against trading the commodity itself. If you’d like to invest with us, you will need to open a Share Dealing account to use our MarketsI platform. 

A word of warning: trading oil, like trading all commodities, contains risk of capital loss. Only trade if you can afford any potential losses.  

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Markets.com, operated by Finalto (Australia) Pty Ltd Holds Australian Financial Services Licence no. 424008 and is regulated in the provision of financial services by the Australian Securities and Investments Commission (“ASIC”).

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